Rand surge raises hopes Reserve Bank won’t raise rates any time soon

The rand’s flying start to 2019 has increased the chances of the Reserve Bank keeping rates on hold until late in the year.

The rand, which often acts as proxy for sentiment in emerging markets due to its status as one of the most heavily traded currencies, on Thursday gained 0.22% to R13.286/$, its strongest level since August. Against sterling it was 0.2% weaker at R17.4852/£, but gained 0.33% to R15.2326 against the euro.

The South African currency has outperformed all of its emerging-market peers in January, having gained 7.35% against the dollar, compared to the Russian rouble’s 5.64% appreciation.

The rand surged 2% on Wednesday after the US Federal Reserve kept interest rates at 2.25% to 2.5% and gave a statement that was so dovish it prompted some traders to speculate that the next movement in US rates could even be down.

As recently as December, Jay Powell, the chair of the US central bank, was signalling two interest-rate increases for 2019.

Higher interest rates in the US often dim demand for emerging-market assets such as SA bonds by reducing their yield advantage. They also increase the prospect of their central banks raising rates to preserve that advantage and prevent weaker currencies from fuelling inflation. SA’s central bank kept its repo rate at 6.75% in January.

Government bonds firmed with the yield on 2026 securities falling 16-basis points to 8.575%, the lowest since June.

With pressure easing on the Bank to raise interest rates in the midst of an election campaign, there might also be political dividends as debates fade around its independence and ownership — which governor Lesetja Kganyago has said may damage investor confidence.

Analysts are predicting that the Bank may raise rates only once in 2019, in November.

There are still international and local risks that may see the rand losing its status as a market darling, analysts cautioned.

February’s budget and elections later in 2019 have been cited as key risks for the country’s credit rating.

The rand may trade between R13.80/$ to R14.32/$ in the first half of 2019, according to Nedbank economist Isaac Matshego.

“Experience has told us to prepare for the worst, because we often get close to it,” Ian Cruickshanks, chief economist at the Institute of Race Relations said.

Despite significant foreign inflows into SA’s bond and equity market, the heavy selling in these asset classes in 2018 showed that confidence in SA was still not very deep-seated, Cruickshanks said.

The JSE’s 2.69% gain in January was capped by a slump in retail companies’ shares after a series of disappointing trading updates. These included Mr Price and Shoprite, signalling weak consumer spending, which may itself be another reason to bet on interest rates remaining unchanged.

gernetzkyk@businesslive.co.za